Here's What's Concerning About Shaanxi Beiyuan Chemical Industry Group's (SHSE:601568) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shaanxi Beiyuan Chemical Industry Group (SHSE:601568), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shaanxi Beiyuan Chemical Industry Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.065 = CN¥775m ÷ (CN¥15b - CN¥2.8b) (Based on the trailing twelve months to December 2023).

So, Shaanxi Beiyuan Chemical Industry Group has an ROCE of 6.5%. On its own, that's a low figure but it's around the 5.5% average generated by the Chemicals industry.

See our latest analysis for Shaanxi Beiyuan Chemical Industry Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shaanxi Beiyuan Chemical Industry Group's ROCE against it's prior returns. If you're interested in investigating Shaanxi Beiyuan Chemical Industry Group's past further, check out this free graph covering Shaanxi Beiyuan Chemical Industry Group's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Shaanxi Beiyuan Chemical Industry Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.5% from 26% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Shaanxi Beiyuan Chemical Industry Group have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Shaanxi Beiyuan Chemical Industry Group (at least 2 which are potentially serious) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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